Anatomy of a market decline: Why it pays to think long term


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Anatomy of a market decline: Why it pays to think long term

  1. 1. Anatomy of a Market Decline Market declines Since 1926, the S&P 500 has dropped by 10% or more on 15 different occasions and 20% or can be unsettling more on eight occasions. During each of these declines, nervous investors have worried and for investors wondered if the stock market could ever recover after falling so far in such a short amount of time. Despite a lot of negative talk and pessimism from so-called financial experts claiming, “Well!! THIS time it’s different!,” the market has always rebounded to new highs. Sure, in many cases it took more patience and time to get back lost gains, but in each case we did. It is tough to keep perspective and focus on the big picture during difficult times like these. Considering the points below can help prevent you from making rash or emotional decisions. History shows that The chart below shows that over time, drastic downturns in the stock market have usually market downturns been followed by long periods of recovery. Consider that the average duration of past market were followed by downturns was 12.5 months, excluding the Great Depression, when the average downturn upswings was just under 11 months. The average recovery for the market was 23 months. Market Downturns and Recoveries 1926-2007 Over the past 80 years, consecutive periods of negative returns have always been followed by strong market upswings. The chart below shows that after several periods of consecutive negative years, the market rebounded positively. The average gain in these recovery years was 37.3%, compared to the long run S&P 500 return of 10.4%. Investors on the sidelines may have missed out on these exceptional returns. 1 of 4 92-0602 (1008)
  2. 2. Periods of Consecutive Negative Stock Returns 1926-2007 Some investors may take pause about investing while the economy is in a recession. The U.S. Investors have economy has gone through ten recessions in the past 50 years. Looking back at past stock benefited from performance during recessions, we see that stocks always came back quickly, even during times investing during when the economy was officially in a recession. According to Birinyi Associates, stocks tend to a recession hit the bottom two-thirds of the way into a recession. This pattern demonstrates that selling out of positions while in a recession would be an ill-advised strategy that would cause investors to miss the post-recession market correction. Post recession stock performance has also shown exceptional returns over time for both small and large stocks. Stock Performance During Recessions 1946-2007 Hypothetical value of $1 invested at the beginning of 1946. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly to an index. 2 of 4
  3. 3. Stock Performance After Recessions 1945-2007 Cumulative returns of large and small stocks after recessions 1945-2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Troubling economic The recent decline in the stock market should serve as a reminder that, historically, some of the best times can prove times to have entered the market have been during extremely dark periods with high volatility: good for investors • The best five-year return in the S&P 500 since 1926, actually started during the Great over time Depression when stocks rallied 367% from May 1932 to May 1937. • The second best five-year period began in 1982, during an economy experiencing one of its worst recessions since World War II and featuring double-digit levels of unemployment. • The third period occurred during the 1994 Federal Reserve rate tightening that sent the dollar in a downward spiral. Three Best Periods to Enter the U.S. Stock Market Since 1926 Great Depression Largest Fed Worst recession in Tightening in 367% a quarter century 20 Years 267% 251% May 1932 July 1982 December 1994 Subsequent 5-Year Return Source: Morningstar Encorr 3 of 4
  4. 4. Investing in a down As you can see, historically, the worst time to get out of the market has been when it has fallen significantly. In fact, the stock market has tended to make significant gains following market can be a recession or economic downturn. Investors who bought into the market during troubled right, even though economic times enjoyed above average returns over the following five years. While it may it feels wrong be painful or seemingly go against our instinctual reaction to a loss, economic downturns provided a good time to invest. The Northwestern Mutual Source: ©2008 Morningstar, Inc. All rights reserved. Used with permission. Life Insurance Company • Milwaukee, WI Past performance is no guarantee of future results. The Northwestern Mutual Financial Network is a marketing name for the sales and distribution arm of The Northwestern Mutual Life Insurance 92-0602 (1008) Company, Milwaukee, WI (NM), its subsidiaries and affiliates. All securities are offered through Northwestern Mutual Investment Services, LLC (NMIS), 1-866-664-7737. Member FINRA and SIPC. NMIS is wholly owned by NM.